There's A Funny Sentiment Shift About Apple Stock On Wall Street Right Now

Earlier in the week I wrote a post previewing AAPL’s Word Wide Developers Conference (below) where the title suggested that expectations were high.  Let me clarify a little bit, they are only high because the company and Tim Cook in particular have their back against the wall a bit given what appears to be a lull in product innovation since Steve Jobs death in late 2011.

As I write, AAPL is down nearly 2% on the week, making back about a percent off of this mornings lows after flirting with the stock’s 50 day moving average.   At this point I think it is safe to say that when Tim Cook takes the stage for the keynote address on Monday afternoon expectations for tangible new products are not running high.  Most of the speculation over the last few weeks has surrounded on the operating system improvements and potential services like iRadio and possibly electronic payments.

It is my strong belief that investors will be disappointed by AAPL merely updating their software and services to a place that many in the “Technorati” already feel Android is.  If in fact there is no “WOW” moment at WWDC the next identifiable catalyst will be fiscal Q3 earnings that will fall in late July and Aug expiration.

I am clearly not a raging bull on the stock and think that this summer, possibly prior to earnings the stock could retest the $400 level on the mere fact that product news remains allusive.  That being said I would likely be a long term buyer of the stock on the next re-test.

But here is the thing, it appears that the investment world is in universal agreement that the lows are in, and from what I can tell from the financial press, Twitter, communication with investors and pundits, everyone and their mother is Long….again.  In the last month, Leon Cooperman and just recently Jeff Gundlach on CNBC’s Halftime report Tuesday, suggested they are long and that the stock has bottomed, and if you agree with them, and you are long… a levered overwrite could be the way to add some juice to your position without additional risk, aside from being called away at a much higher level (which is good!)

Theoretical Trade Against a Long Stock Position:

-Buy 1 Aug 475 call for ~10.00

-Sell 2 Aug 500 calls at ~5.00 each or 10.00 total

Break-Even on Aug Expiration:

-Profits of stock btwn 441 and 500, profits of up to 25 btwn 475 and 500, max gain of 25 if stock is 500 or higher.  In that instance your long stock would be called away with 59 profits plus an additional 25, which would equal an added 5.5%.  Btwn 441 and 475 just the profits of the stock and the ratio call spread expires worthless.

-Losses of the stock below 441.

Payout Diagram:

100 shares AAPL vs Aug 475/500 call 1×2 from TradeMonster

As you can see from the chart, the 1×2 acts to juice your long to 500, a level that would provide stuff resistance if AAPL manages a summer rally or pops on August earnings. This is a great structure if you bought the stock down here and would use 500 as a level to exit… it is also a great structure if you are long the stock higher and wish to get some of your money back on a rally back to 500.

Trade Rationale:  To summarize Jeff Gundlach in his interview with Scott Wapner on the Fast Money Halftime show on Tuesday:  Gundlach thinks sentiment is poor, the stock is cheap,  technicals show a base and cash distribution should offer support.  Here are some quotes:  ”it is too cheap”, and $500 should be a fairly easy place for the stock to go to” and ” basing out in a way that is fairly encouraging” he thinks “stock is a nice inclusion at current levels given low PE”.

That’s how I chose the strikes, to get to $500, earnings and guidance will need to be one of the catalysts.

Update -Video from Options Action on CNBC Friday June 7th discussing AAPL’s WWDC & the options strategy that I detailed above:

Original Post:  MorningWord 6/5/13:  WWDC & Great Expectations – $AAPL 

MorningWord 6/5/13:   This coming Monday in San Francisco, AAPL CEO Tim Cook will take the stage at the company’s World Wide Developers Conference “WWDC”, and make no mistake about it, expectations are running hot. Despite the strong likelihood of little new tangible product news.  Last Thursday, Enis highlighted Goldman Sachs’ derivative research team’s suggestion (here) to buy June 450 calls in front of the event, as they expect:

this event to once again be a positive catalyst for shares – this time driven by refreshes of existing services (iCloud and Siri) and/or a preview of the new iOS7 operating system. The options market has underestimated the positive nature of this event in the past. Over the past 10 years, looking from 10 days prior to WWDC to 1 day after, shares averaged a +5% return and implied volatility rose by +7% (average)

Well the stock hasn’t quite run just yet, at least not on anticipation of the event, and AAPL’s ytd performance remains a massive outlier on the downside (-15.5% ytd), just as it had on the upside in its amazing bull run up to last year.  But just as many have called for a long term bottom in AAPL of late, the one month chart below shows some fairly peculiar behavior starting off with the ~10% peak to trough correction, for apparently no reason, starting on May 8th and ending on May 16th and the subsequent 7.5% rebound that has seen the stock forming a decent base at near term support.

AAPL 1 Month chart from Bloomberg

Given next week’s conference and the potential for a positive catalyst to be announced, many market technicians have suggested that the stock could have recently made a Reverse Head & Shoulders bottom as we previously referenced  courtesy of Greg Bender of Bloomberg on May 30th.

AAPL 1 yr chart from Bloomberg

IN my early run through of product expectations from Wall Street and from the Blogosphere, it appears that few expect anything meaningful on the hardware front (possibly new MacBooks per BGR.com), while most are focused on a major upgrade of iOS (per GS via BusinesInsider.com) and added services like the rumored Pandora “Killer”, iRadio (per AppleInsider.com) or fingerprint scanning (here).

If you are buying the stock or calls for a trade into the event, my sense is that if there is any excitement it is probably going to come in the lead up to the event.  If the only material product additions are in fact software or services to be released in the fall I worry that there are few catalysts if any to own the stock (aside from share repurchase) between now and the iPhone launch in late Sept.

There are 3 things I would like to see happen in the days prior to WWDC, a rally back to resistance at or around $470, a selloff to 420 and/or an implied volatility spike.   A vol spike would be a nice opportunity to sell short dated vol and the price move could provide a nice entry to play for a reversal back in range.

Yesterday on CNBC’s Fast Money Halftime Report with Scott Wapner, investor Jeff Gundlach, who was short AAPL last year, recently just bought the stock around $405 and gave his reasoning for it:

To Sum Up, Gundlach thinks sentiment is poor, the stock is cheap,  technicals show a base and cash distribution should offer support.  Here are some quotes:  ”it is too cheap”, and $500 should be a fairly easy place for the stock to go to” and ” basing out in a way that is fairly encouraging” he thinks “stock is a nice inclusion at current levels given low PE”.

What’s most interesting is that Gundlach did not once mention the words new products in that interview.  That is what is going to drive the stock back above $500.  He did say that it is unlikely the stock sees $700 anytime soon, but given the market’s ytd rise and the unprecedented cash distribution plan, I would suggest that the stock is gonna need something more than buybacks, dividends & low PE to get this pig back to unchanged on the year ($532.17).

Last week at the WSJ’s All Things D conf, the most telling thing thing Tim Cook said on the product front was, “The wrist is interesting,” (here at 6:35pm) alluding to their probable entrance to the wearable computing market.  I am not sure this is gonna do it in 2013, if iWatch is the the iThingy that restores innovation. Don’t get me wrong, there are many technical aspects about AAPL the stock that are getting increasingly attractive, but some of the core fundamentals characteristics of the company, that have driven the stock’s success in the last decade still remain allusive.  I am still in the camp that a retest of the previous lows, possibly in front of, or after fiscal Q3 earnings in late July could be the appropriate spot to set up for a second half  of 2013 that could see refreshes and additions to iPad, iPhone and possibly something in the living-room.

View the original article here